LS7 - Decision Making

Question 1

What are the 2 approaches you should follow when making assumptions?

Answer 1

Deduction, induction

Question 2

What is deduction?

Answer 2

Starting with a hypothesis and trying to prove it

Question 3

What is induction?

Answer 3

Using evidence which you collected

Question 4

Which schools of thought follow a deductive approach to making assumptions?

Answer 4

Classical

Neoclassical

Question 5

Which schools of thought follow an inductive approach to making assumptions?

Answer 5

Behavioural

Keynesian

Question 6

Which economist is known for the Classical school of thought?

Answer 6

Adam Smith

Question 7

Which economist is known for the Neoclassical school of thought?

Answer 7

Alfred Marshall

Question 8

Which economist is known for the Behavioural school of thought?

Answer 8

Richard Thaler

Question 9

Which economist is known for the Keynesian school of thought?

Answer 9

Joan Robinson

Question 10

What does ‘being rational’ for consumers mean?

Answer 10

Buying products which maximise their utility

Question 11

What is utility for consumers?

Answer 11

The satisfaction or benefit derived from consuming a good

Question 12

What does ‘being rational’ mean for firms?

Answer 12

Maximising utility / maximising profit

Question 13

What is utility for firms?

Answer 13

Maximising their profit

Question 14

In which schools of thought are decision makers assumed to be rational?

Answer 14

Classical

Neoclassical

Question 15

What do economic agents require to make rational decisions?

Answer 15

Time
Information
Ability to process the information

Question 16

What can cause decision makers to make irrational decisions?

Answer 16

Lack of time / information
Being weak at computation
Habitual behaviour / Consumer inertia
Being influenced by other people
Framing and Bias

Question 17

What does Behavioural Economics assume?

Answer 17

Individuals wish to maximise their utility, but may not be able to due to different reasons

Question 18

What is Nationalisation?

Answer 18

The process of bringing economic activity under state control

Question 19

What is Privatisation?

Answer 19

The process of transferring economic activity from the state to the market

Question 20

What is assumed of workers in neo-classical economics?

Answer 20

They maximise their welfare at work by considering pay, job security, location, satisfaction from working and the value of the other alternatives

Question 21

What are the disadvantages of neoclassical economics?

Answer 21

Not all decisions that are made are rational
It can be over-simplified as some governments can be biased or corrupt, and managers can make decisions which benefit them

Question 22

What is marginal analysis?

Answer 22

Analysing one isolated / marginal situation without considering its possible future knock-on effects

Question 23

What is homo-economicus?

Answer 23

The perfect rational human which is used by economists when constructing, explaining and verifying models

Question 24

What is consumer inertia?

Answer 24

People not changing their behaviour because they think it is not worth the effort

Question 25

Why can framing and bias cause consumers to make irrational decisions?

Answer 25

Economic statements can be manipulated in a way to become biased which influences consumers

Question 26

What does it mean ‘to default’?

Answer 26

To fail to pay money that you owe at the right time